CalPERS Supports Carbon Pricing

The largest US pension plan wants heavy carbon emitters to pay as part of a plan to combat climate change.

Investment officials at the California Public Employees’ Retirement System (CalPERS) are developing a formal policy in support of carbon pricing, with the aim of making large greenhouse gas emitters pay a price for their emissions.

While officials of the largest US pension system, with $354.4 billion in assets under management, have long supported carbon pricing, they have never had a formal policy on the issue. Such a policy would help shape CalPERS’s engagement with the energy companies in its portfolio in particular, as it attempts to negotiate with them on reducing their carbon emissions.  

A draft policy presented to the system’s investment committee at its March 19 meeting says CalPERS wants a “clear carbon pricing framework that approximately prices the externalized cost to the economy and society from greenhouse gas emissions.”

Generally, there are two carbon pricing schemes in place in parts of the world: taxing companies with large greenhouse gas emissions or a cap-and-trade system, which requires companies that are big carbon producers to buy permits from companies with smaller emission profiles.

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Under that scenario, the number of permits are limited, and they decline in number as years go on, meaning the bill continues to rise for companies with heavy emissions.

Beth Richtman, CalPERS’s managing investor director of sustainable investments, didn’t specify what approach she favored at the March 19 meeting, although she did say that specific prices should be set on carbon emissions by companies.

“An effective carbon pricing framework should decrease emissions and therefore the physical risk to investors’ portfolios from climate change,” she said.

Richtman told the investment committee that she and her team will be coming back with a formal policy on carbon pricing for their consideration at a later date but didn’t specify exactly when that would occur.

She told the investment committee that carbon pricing is necessary for the world to live up to the 2015 worldwide Paris climate change agreement to keep the rise in global temperatures to well under 2 degrees Celsius.

“This would shield our portfolio from the worst [effects] of climate change,” she said of a carbon pricing plan.

CalPERS has a large global equity portfolio of more than $170 billion, so its efforts on carbon pricing are aimed globally. CalPERS’s home state of California is one of the few in the US that have adopted some type of carbon-pricing system.

A cap-and-trade system law was passed in 2011, requiring large carbon emitters to buy permits that allow them to continue to produce large amounts of carbon. The alternative to buying the permits was for companies to voluntarily make emissions cuts. Carbon emissions have gone down since the law went into effect in California, but the state has also put into place broad-based rules requiring, for example, utilities to significantly increase the amount of renewable energy they use to generate power. By 2030, utilities in California must get 50% of the power to generate electricity from renewable power sources. So, it’s unclear what effects in terms of carbon reductions can specifically be attributed to carbon pricing.

The United States as a whole has no carbon pricing rules and attempts by Democratic lawmakers to get a bill through Congress on the issue have gone nowhere in what had been the Republican-dominated Congress. Approximately 40 countries have some type of carbon-pricing systems.

Just two weeks ago, Canadian Prime Minister Justin Trudeau put a carbon tax on the governments of Ontario, Manitoba, Saskatchewan, and New Brunswick for failing to come up with a plan to reduce carbon emissions. All provinces in Canada were required to submit a plan as most of Canada embraces carbon pricing.

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At Pension Bridge: Finding Opportunity in Real Estate

What’s working now and how to take advantage of what isn’t.

When in doubt about asset allocation, real estate is a sector that is coming in handy for institutional investors.

“I actually think we’re in a great real estate cycle,” said Anthony Breault, Oregon State Treasury’s senior real estate investment officer, at the Pension Bridge conference in San Francisco. “It’s a renaissance, quite frankly,” he said, citing an abundance in multi-family housing and work office development.

The $77 billion sovereign wealth fund used to be a much more aggressive investor until about 2015, when it shifted to core real estate in a bid to be less risky. And it has paid off. “From a risk standpoint, I think we’re a pretty good girl at the dance,” Breault said.  “I don’t lose sleep at night whatsoever looking at core.” Oregon Treasury has roughly $9 billion in the property space.

Other panelists, such as Paul Nasser, chief financial officer and chief operating officer of Boston-based Intercontinental Real Estate Corp., pointed out that evidence about any slowdown is scarce.

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“I sort of come at things with a risk perspective, and yet, it’s really difficult for me to see a lot of warning signs out there,” he said, noting that a slowing from 5% growth to 3% is still growth.

The increasing speed of technology and other trends mean that real estate investors need to be nimble these days, the panelists contended.

“Real estate strategies that worked very effectively 10 or 15 years ago do not necessarily work very well today given changes,” said Brian Nottage, managing director and head of research for US real estate at JP Morgan Asset Management. He pointed to a midtown Manhattan office building that once was a cash cow. Now, not so much.

“One big reason is the way that tenants use their space is changing, so they want to densify their space, they’re willing to be in more places than they ever have been before,” he said. “That is just a sea change, which has meant that a lot of buildings built during the ’60s and ’70s that have been traditional ‘A’ buildings are not ‘A’ buildings anymore, and they have to fundamentally re-price where they are.”

Another change Nottage noted was how warehouses were traditionally purchased in the middle of nowhere and are now being bought closer to the population, thanks to Amazon and other online retailers, who need to make fast deliveries to customers.

Regardless of change, there is always opportunity. Retail, a sector being disrupted by technology, is not looking too hot at the moment, but the Pension Bridge panelists believe the market will evolve and that there is always a way to revamp existing properties.

“I think you do buy retail right now, and I do think you take it, and I think you do invest it, and you change it,” said Tim Bellman, head of global research for Invesco Real Estate in the US, which has purchased old Sears department stores and repurposed them into hotels and apartments. “The challenge in the risk is that in the underwriting of those projects, you don’t allow for the incredible capex that you’re going to have to continue to put into those properties to make them continue to be successful.”

Other areas of interest include smaller, creative-type offices, multifamily apartments, and industrial developments.

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